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The journey to success in Forex trading begins with self-introspection and discovering the trading style and strategies that suit your objectives, risk appetite, lifestyle and own unique circumstances. It is imperative to find a trading technique that is in sync with your personality than to try to conform to someone else's idea of a "proper trader". This article seeks to help traders discover their own trading styles.
The first port of call is assessing you level skill, competence and preparedness for the task of Forex trading by answering a series of questions. These questions if answered correctly will help in moulding a top notch trader. The best trading style for any individual depends on many factors including the reasons to trade, availability, work preferences, requirement for flexibility and level of patience
Reasons to trade:
Understanding the reasons behind the trading will help in setting the overall objectives and understand how trading will fit into your lifestyle. Answering the following questions will help you understand if trading is the best thing.
1. What made you interested in trading in the first place?
2. What are you aiming to get out of your trading?
3. What will a successful trading business mean?
4. How will trading fit in with the other areas of your life?
In answering these questions, you will be able to discover if Forex trading is the right way to invest your hard earned money.
Capacity and availability
This relates to the amount of time devoted to trading as this will be a large determinant of the best trading strategy . The key questions that will need to be answered are:
1. Can you devote a certain time to trading every day the markets are open? (yes / no)
2. Can you focus exclusively on the markets during market hours without distraction? (yes / no)
3. How much time can you devote each day to run your trading rules? (hours)
4. How much time outside market hours are you able to devote to research and development of your trading system? (hours)
As an example if one has a day job and cannot watch the markets and place trades throughout the day then short term and day trading strategies simply will not work.
Work preferences
The trading process should at the very least be fulfilling to any prospective trader because they are going to be spending a reasonable amount of time pursuing it. In assessing the work preferences it is important to have answers to the following questions by rating each of the following activities on a scale of 1-10, with 10 being “I live to do this” and 1 being “I can’t imagine anything worse”.
1. Studying macroeconomic trends (1-10)
2. Searching for a bargain / value that no one else has identified (1-10)
3. Searching for relationships between different things to find opportunity (1-10)
4. Making quick / nimble decisions to take advantage of short term opportunities (1-10)
5. Looking for profitable patterns that can predict future moves (1-10)
6. Performing complex mathematical studies and programming (1-10)
7. Developing and testing logical rules using simple mathematics (1-10)
8. Identifying a trend and taking advantage of it for as long as possible (1-10)
In answering these questions one will be able to determine if they are more suited to fundamental trading or technical trading. If the answers to the first 4 questions score highly then the trader is more suited to fundamental trading whilst if answers to the last four questions are high scoring then technical trading may be best suited.
Flexibility
One of the cardinal rule for success in trading is consistency in following your strategy as understanding your ability and willingness to follow strict rules is important in selecting the best trading style. Answering the following questions using the same rating methodology as above will give an indication on flexibility.
1. Follow a set of rules every day regardless of whether you ‘think’ that they are right or wrong on this particular occasion (1-10)
2. Perform a set of tasks every day or week to ensure you don’t miss an opportunity (1-10)
3. Apply flexible judgment to your decisions depending on what makes sense at the time (1-10)
If you are comfortable following strict rules to the letter every time, then pure systematic trading with no discretion will likely work well for you.
Patience
Understanding your level of patience and willingness to wait for trades to emerge and profits to develop is important in your selection of the best trading strategy for you. Using the same rating methodology used in the previous questions you will have to answer the following questions to assess the level of patience.
1. I am comfortable waiting as long as it takes to maximize the profit from a particular trade. If a trade takes months to reach its maximum profit, so be it (1-10)
2. I am comfortable doing nothing until I get a trading signal, I am happy not placing a single trade for weeks knowing that my system will get me in at the right time (1-10)
3. I am willing to give a profitable trade some room to move rather than taking profits now knowing that this improves my profitability in the long term (1-10)
4. I want to place trades regularly – every day is preferable (1-10)
The more patient you are as a trader the more flexibility you have to adopt different trading strategies whilst highly impatient traders are limited to shorter term trading systems with lower long term profitability.
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Having answered these simple questions, review each of the common trading strategies to select the one which make the most sense for you based on your answers and the descriptions provided. These questions will start you on your way, but it is highly recommended to keep a trading journal in which you record your journey in detail on an ongoing basis. Some of the more common trading styles are discussed below.
Daily or Weekly Trend Following
This simple strategy follows the daily or weekly trend. Review the daily and weekly charts and find a trend that seems well supported and get in. This is most suited to trader who do not have time to continuously watch the markets. This strategy will require considerable capital and minimal use of leverage as the moves that look small on the chart can span 100's of pips. This entails a conservative allocation of capital when you buy in and allow your trade to develop and a clear exit strategy.
Carry Trading
Carry trading can be used by traders with little time at their disposal to carry out trading operations. Carry trading is when you buy and hold a currency that pays a high-interest rate against a currency that has a low-interest rate. Each day a rollover is paid for the interest differential between the two currencies. The main advantage of this is that even when your trade is not moving, money is deposited into your account daily. However the downside to the carry trade is the interest differentials are not that much compared to the risk of fluctuating prices.
Day Trading
Although the most active Forex trading times are specific, the Forex market is always moving. Depending on your schedule, you can pick and choose your time frame to plan, carry out trades and watch the market develop. This strategy will usually involve closing out all the open positions at the end of the day or hedging them out significantly to reduce downside risk overnight.
Scalping
This involves, opening and closing a trade within small time intervals, taking advantage of small price movements with a large amount of leverage. This strategy will entail high trading turnover. It works well for traders who have dedicated trading time and usually make use of sophisticated trading tools as they depend on technical analysis to make trading decisions.
Conclusion
Trading is a continuous journey of growth and self-awareness leading to greater and greater profitability. Theoretically there is no best trading strategy for any individual trader but it is possible design a near perfect system that will ensure long term profitability.
The first port of call is assessing you level skill, competence and preparedness for the task of Forex trading by answering a series of questions. These questions if answered correctly will help in moulding a top notch trader. The best trading style for any individual depends on many factors including the reasons to trade, availability, work preferences, requirement for flexibility and level of patience
Reasons to trade:
Understanding the reasons behind the trading will help in setting the overall objectives and understand how trading will fit into your lifestyle. Answering the following questions will help you understand if trading is the best thing.
1. What made you interested in trading in the first place?
2. What are you aiming to get out of your trading?
3. What will a successful trading business mean?
4. How will trading fit in with the other areas of your life?
In answering these questions, you will be able to discover if Forex trading is the right way to invest your hard earned money.
Capacity and availability
This relates to the amount of time devoted to trading as this will be a large determinant of the best trading strategy . The key questions that will need to be answered are:
1. Can you devote a certain time to trading every day the markets are open? (yes / no)
2. Can you focus exclusively on the markets during market hours without distraction? (yes / no)
3. How much time can you devote each day to run your trading rules? (hours)
4. How much time outside market hours are you able to devote to research and development of your trading system? (hours)
As an example if one has a day job and cannot watch the markets and place trades throughout the day then short term and day trading strategies simply will not work.
Work preferences
The trading process should at the very least be fulfilling to any prospective trader because they are going to be spending a reasonable amount of time pursuing it. In assessing the work preferences it is important to have answers to the following questions by rating each of the following activities on a scale of 1-10, with 10 being “I live to do this” and 1 being “I can’t imagine anything worse”.
1. Studying macroeconomic trends (1-10)
2. Searching for a bargain / value that no one else has identified (1-10)
3. Searching for relationships between different things to find opportunity (1-10)
4. Making quick / nimble decisions to take advantage of short term opportunities (1-10)
5. Looking for profitable patterns that can predict future moves (1-10)
6. Performing complex mathematical studies and programming (1-10)
7. Developing and testing logical rules using simple mathematics (1-10)
8. Identifying a trend and taking advantage of it for as long as possible (1-10)
In answering these questions one will be able to determine if they are more suited to fundamental trading or technical trading. If the answers to the first 4 questions score highly then the trader is more suited to fundamental trading whilst if answers to the last four questions are high scoring then technical trading may be best suited.
Flexibility
One of the cardinal rule for success in trading is consistency in following your strategy as understanding your ability and willingness to follow strict rules is important in selecting the best trading style. Answering the following questions using the same rating methodology as above will give an indication on flexibility.
1. Follow a set of rules every day regardless of whether you ‘think’ that they are right or wrong on this particular occasion (1-10)
2. Perform a set of tasks every day or week to ensure you don’t miss an opportunity (1-10)
3. Apply flexible judgment to your decisions depending on what makes sense at the time (1-10)
If you are comfortable following strict rules to the letter every time, then pure systematic trading with no discretion will likely work well for you.
Patience
Understanding your level of patience and willingness to wait for trades to emerge and profits to develop is important in your selection of the best trading strategy for you. Using the same rating methodology used in the previous questions you will have to answer the following questions to assess the level of patience.
1. I am comfortable waiting as long as it takes to maximize the profit from a particular trade. If a trade takes months to reach its maximum profit, so be it (1-10)
2. I am comfortable doing nothing until I get a trading signal, I am happy not placing a single trade for weeks knowing that my system will get me in at the right time (1-10)
3. I am willing to give a profitable trade some room to move rather than taking profits now knowing that this improves my profitability in the long term (1-10)
4. I want to place trades regularly – every day is preferable (1-10)
The more patient you are as a trader the more flexibility you have to adopt different trading strategies whilst highly impatient traders are limited to shorter term trading systems with lower long term profitability.
image.jpg
Having answered these simple questions, review each of the common trading strategies to select the one which make the most sense for you based on your answers and the descriptions provided. These questions will start you on your way, but it is highly recommended to keep a trading journal in which you record your journey in detail on an ongoing basis. Some of the more common trading styles are discussed below.
Daily or Weekly Trend Following
This simple strategy follows the daily or weekly trend. Review the daily and weekly charts and find a trend that seems well supported and get in. This is most suited to trader who do not have time to continuously watch the markets. This strategy will require considerable capital and minimal use of leverage as the moves that look small on the chart can span 100's of pips. This entails a conservative allocation of capital when you buy in and allow your trade to develop and a clear exit strategy.
Carry Trading
Carry trading can be used by traders with little time at their disposal to carry out trading operations. Carry trading is when you buy and hold a currency that pays a high-interest rate against a currency that has a low-interest rate. Each day a rollover is paid for the interest differential between the two currencies. The main advantage of this is that even when your trade is not moving, money is deposited into your account daily. However the downside to the carry trade is the interest differentials are not that much compared to the risk of fluctuating prices.
Day Trading
Although the most active Forex trading times are specific, the Forex market is always moving. Depending on your schedule, you can pick and choose your time frame to plan, carry out trades and watch the market develop. This strategy will usually involve closing out all the open positions at the end of the day or hedging them out significantly to reduce downside risk overnight.
Scalping
This involves, opening and closing a trade within small time intervals, taking advantage of small price movements with a large amount of leverage. This strategy will entail high trading turnover. It works well for traders who have dedicated trading time and usually make use of sophisticated trading tools as they depend on technical analysis to make trading decisions.
Conclusion
Trading is a continuous journey of growth and self-awareness leading to greater and greater profitability. Theoretically there is no best trading strategy for any individual trader but it is possible design a near perfect system that will ensure long term profitability.
